What is CAGR? How to Calculate It?
Investment returns are evaluated differently by numerous investors – some consider capital gains, and yet others consider annual returns. This is where the role of CAGR or Compound Annual Growth Rate becomes crucial. What is CAGR exactly, and how do you fathom it? Let us deconstruct what it implies. What is CAGR? It stands for Compound Annual Growth Rate. It is the rate at which investment grows on average annually, over a certain period, and with the assumption that profits were reinvested at the end of each year. In simple terms, it is the rate telling you how much your investment would have grown each year had it compounded steadily at that rate on an annual basis. Why is CAGR Important? Suppose your investment grew at different rates every year – CAGR simplifies that into one rate, uniform for every year. CAGR Formula The formula for CAGR is: Where: How to Calculate CAGR (Example) Let’s say you invested ₹1,00,000 in a mutual fund. After 5 years, it grew to ₹1,80,000. Things to Remember About CAGR Interpreting CAGR Results What does a high or low CAGR tell you? Evenly comparing the CAGR across various assets or time can help determine which has been the best investment. But, always remember that the CAGR assumes growth to be smooth and continuous, which in reality, it generally is not. There can be instances of sudden dips in the market, and these could camouflage the picture. Some professionals suggest that the CAGR is misleading if used alone. It does not measure fluctuations or risk. To get a full picture, use other metrics together with CAGR, for example, volatility or maximum drawdown. Practical tips for effective use of CAGR To get the most out of CAGR, follow all the below tips: As you become more familiar with CAGR, you’ll spot opportunities and risks faster. It’s a simple number, but its insights run deep. Final Thoughts CAGR is a simple yet powerful tool that helps you understand how your investments have performed over time – as if they had grown at a steady rate. Whether you’re comparing mutual funds, stocks, or even your business’s sales growth, knowing how to calculate and interpret CAGR can make you a smarter investor! 👉 Join The Safe Trader Academy today and start trading like a pro.